More things that make you go, “hmmm…”

Amid the rout, it emerged that police acting on orders from the prosecutors of Trani, a port on Italy’s Adriatic coast, had raided the Milan offices of the rating agencies, Moody’s and Standard & Poor’s, as part of continuing investigations into their role in recent financial turmoil. The chief prosecutor in Trani told Reuters his office was checking to see whether the ratings agencies “respect regulations”.

There are intimations that this could turn out to be more than a mere market plunge; European stresses are starting to make some nasty financial ripples that suggest a possible mini-Lehman event, although I think — I hope — governments and central banks will head this off. But if you had any doubts that we were on the wrong track, this should resolve them.

Meanwhile, Italy’s spread against German bonds is soaring even further. What are markets pricing in here? Default as a real possibility; maybe even euro breakup. The latter certainly sounds a lot more plausible now than it did a few months ago.

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This entry was posted on August 4, 2011 at 9:13 pm and is filed under economy, Europe, stock market.
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I actually think S&P is exactly right in doing a downgrade, even if it is being done for political reasons, even if they’re incompetents and hypocrites, and even if they haven’t messaged it very well. [added: see also Thom Hartmann here]

As long as the US refuses to raise taxes, it cannot reduce its debt burden (except by looting Social Security and Medicare, which is not a solution). Ending the wars will not do it.. Even cutting defense spending to reasonable limits will not do it. Taxes will only do it about halfway. And, looking at the CBPP chart, we need new room for investment to close the output gap (the part of the chart labeled “economic downturn”) more quickly than baseline.

Deficits larger than ca. $450 T will increase the debt burden, while deficits below that still might increase the debt burden (because the baseline doesn’t assume other bad news, like global warming, that is in the pipeline. Furthermore, all of this analysis is predicated on low interest rates. If Asians stop funding our deficits (if by demographics alone), interest rates will start to matter more and more.

So, we need a radical, urgent change of course involving ending the tax cuts and the wars, investing to put people to work, retiring debt, and mitigating climate change. Otherwise, we are on the path to being less able to service our existing debt. S&P called it exactly right, even if they are bad and incompetent people. And Jane, while right to be angry at their badness and hypocrisy, is wrong in the larger picture for failing to understand this.